It is now a well-established fact that the retail sector was both broadly and deeply affected by the Covid-19 pandemic, in the US and abroad. Our NAI Global Real Estate Outlook study, Q42020, includes the finding that over half of survey respondents (57%) said the “Amazon effect” was expected to have an even larger impact on their CRE markets than the pandemic itself.
Additionally, as we’ve reported, e-commerce fulfilment and warehousing are now seen as a dominant drive factor in real estate markets, leading the report authors to deem e-commerce “an enduring trend”.
With a kind of “new dawn” of retail being ushered in – generally, and at pace because of the pandemic – commercial real estate (CRE) professionals are now adjusting and reconfiguring expectations. So, what does this shift mean for the broker-owner-tenant relationship?
For one thing, the model of contract may be in a state of flux. Faced with empty halls and stores, many retail landlords and tenants renegotiated their terms with a view to bunkering down through the tough times. A popular option was to move from a traditional fixed-rate rental agreement to one based on sales or revenue.
The Wall Street Journal (WSJ) reports that although this gave “retailers breathing room when sales decline and allow[ed] landlords to reap the upside when sales recover[ed]”, it hasn’t been without difficulties – especially when you factor in multi- or omnichannel sales:
“With e-commerce soaring, some landlords want to include a portion of online sales in the new leases, arguing that physical stores play an important role in many of these transactions. Retailers are pushing back, according to landlords, real-estate brokers and retail executives…”
Additionally, there is not much of an industry standard in place for these types of agreements yet. The WSJ report says this can range from 5 to 15% of monthly sales, in addition to a set fee for maintenance, property taxes, common area usage, and so on.
Many believe that we will see a big push back to “traditional” models post-pandemic.
If this new model is on the cards, it is essential to have all terms defined and bases covered. Law firm Pisent Masons (UK-based), for example, caution that “if landlords adopt this approach… leases will include a turnover break, allowing the landlord to remove an underperforming tenant” if necessary.
Here a smart CRE professional can be an immense value add to both sides of the owner-tenant equation. “At NAI Global, we take the view that having a local retail space expert on the ground can make all the difference,” says Jay Olshonsky, NAI Global President & CEO.
“Crucially, although they are a representative of owner or landlord, an agent comes to the negotiating table with a clear head and a degree of neutrality – as advisors to both. They are best-placed to understand both views, the sticking points, and are motivated to deliver outcomes that are a success for all parties,” Cliff Moskowitz, EVP of NAI Global adds.
This is also where a new consultancy role can be useful, to relook at the model from scratch and perhaps even develop a new model with benchmarking, feasibility, and strategy baked in.
The investment view
Any shift in the model has implications for real estate investment trusts (REIT) and similar investment vehicles, from a risk perspective and performance. This could mean rethinking the risk level of REITs, traditionally considered riskier than bonds but safer than equities.
“There are pros and cons for the investor to consider,” says Moskowitz. “On the one hand, a REIT participant doesn’t need to directly manage model changes – as this falls to the trust managers. On the other, it may mean that all parties now carry a share of the operational business risk. “